16 August 2016 Asia Pacific/Japan Equity Research Engineering & Construction (Construction (Japan)) / OVERWEIGHT

Comsys Holdings (1721 / 1721 JP) Rating OUTPERFORM* Price (15 Aug 16, ¥) 1,797 INITIATION

Target price (¥) 2,400¹ Chg to TP (%) 33.6 Market cap. (¥ bn) 253.38 (US$ 2.51) High OP growth due to 5G base station capex, Enterprise value (¥ bn) 221.38 Number of shares (mn) 141.00 total yield of 5.5%: initiating with OUTPERFORM Free float (%) 55.0 52-week price range 1,925 - 1,372 ■ Action: We initiate coverage of Comsys Holdings with an OUTPERFORM *Stock ratings are relative to the coverage universe in each rating and a target price of ¥2,400 (potential return 33.6%). analyst's or each team's respective sector. ¹Target price is for 12 months. ■ Investment case: Our OUTPERFORM rating reflects: (1) a prospective total Research Analysts yield in FY3/18 of 5.5% (dividend yield 2.7%, return from buybacks 2.9%) Masahiro Mochizuki with attractive income growth, (2) faster projected OP growth than the rest of 81 3 4550 7389 the construction sector, and (3) scope for gross margin improvement over [email protected] the next three years due to increasing demand for base station infrastructure Yasuko Fukuda 81 3 4550 9259 related to the rollout of new, faster networks (4G and 5G). [email protected] ■ The stock is trading on a prospective P/E of 10.6x based on forecast FY3/18 earnings, at the bottom of the post-2008 range for this valuation multiple. We think the current share price reflects neither the high total yield nor the scope for future gross margin improvement. Comsys is also undervalued relative to break-up value, with a P/B of less than 1.0x based on our FY3/18 forecasts. We see it outperforming the construction sector in the future. ■ Catalysts/risks: Potential catalysts: (1) growth in orders for projects with higher margins, (2) improved gross margins, and (3) higher shareholder returns. Risks include: (1) a delay to the start of 5G services beyond 2020, resulting in failure to win 5G orders from NTT DoCoMo (9437) in FY3/18 and FY3/19, (2) labor cost inflation and (3) a fall in orders. ■ Valuation: We base our ¥2,400 target price on FY3/18E EPS of ¥171 and a prospective P/E of 14.0x (details on page 5). ■ HOLT indicates there is 26% potential upside.

Share price performance Financial and valuation metrics

Year 3/16A 3/17E 3/18E 3/19E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 320.7 342.7 350.4 351.6 2000 120 Operating profit (¥ bn) 23.8 25.7 27.0 28.1 1800 100 Recurring profit (¥ bn) 24.2 26.1 27.5 28.6 1600 80 Net income (¥ bn) 15.4 17.1 17.8 18.5 EPS (¥) 139.2 159.0 170.8 183.3 1400 60 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 147.9 152.2 153.0 The price relative chart measures performance against the EPS growth (%) -4.9 14.2 7.4 7.3 TOPIX which closed at 1316.63 on 15/08/16 P/E (x) 12.5 11.3 10.5 9.8 On 15/08/16 the spot exchange rate was ¥101.14/US$1 Dividend yield (%) 2.0 2.5 2.7 3.0 EV/EBITDA(x) 5.7 5.3 4.8 4.4 Performance over 1M 3M 12M P/B (x) 0.99 0.95 0.89 0.83 Absolute (%) 4.8 -5.9 5.8 ROE(%) 7.9 8.6 8.6 8.6 Relative (%) 4.9 -4.5 26.7 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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16 August 2016 Table of contents

Initiating at OUTPERFORM 3 Sustainably high returns make stock attractive 3 Share price performance 4 Target price and valuation 5 Reliable performance 6 Subsidiaries and business segments 7 Detailed earnings forecasts 10 Expecting OP growth to continue 10 Demand assumptions for NTT engineering segment 11 Expecting sales booked on orders in same or following fiscal year 14 Risks 15 Shareholder returns 15 Forecasts and valuation 17 HOLT analysis 21

Comsys Holdings (1721 / 1721 JP) 2 16 August 2016 Initiating at OUTPERFORM Sustainably high returns make stock attractive We initiate coverage with an OUTPERFORM rating and a target price of ¥2,400 (potential Initiating at OUTPERFORM return 33.6%). Comsys Holdings generated approximately 60% of its orders and sales in with a ¥2,400 TP FY3/16 from NTT (9432), Japan’s largest domestic telecommunications carrier. Sector-relative valuation We use a sector-relative rating system. As outlined below, Comsys offers higher yields than other construction companies, and its valuations are likely to rise, in our view.

Figure 1: Valuations of stocks in the construction sector under our coverage Housing, construction sector Target Share price (¥) Chg to EV/EBITDA P/E P/B Dividend yield Rating P/NAVPS price (¥) 8/15/2016 TP FY3/17 FY3/18 FY3/17 FY3/18 FY3/19 FY3/17 FY3/18 FY3/17 FY3/18 1721 Comsys Holdings 2,400 1,797 33.6% OUTPERFORM 5.3 4.8 11.3 10.5 9.8 1.0 0.9 2.5 2.7 1.04 1801 Taisei Corporation 990 809 22.4% OUTPERFORM 6.4 5.4 12.0 11.0 10.8 1.7 1.5 2.2 2.5 1.81 1802 Obayashi Corporation 1,300 981 32.5% NEUTRAL 6.6 6.2 10.0 9.9 9.8 1.2 1.1 1.9 2.0 1.21 1803 Shimizu Corporation 1,300 976 33.2% OUTPERFORM 7.5 6.7 11.1 10.3 9.5 1.4 1.3 1.8 2.0 1.45 1808 Haseko Corporation 1,200 1,039 15.5% NEUTRAL 2.7 2.2 5.5 5.7 5.7 1.3 1.1 1.9 1.9 1.69 1812 Kajima Corporation 700 739 -5.3% UNDERPERFORM 7.3 6.3 11.0 9.9 9.8 1.5 1.3 1.8 2.0 1.36 1893 Penta-Ocean Construction 690 580 19.0% OUTPERFORM 6.3 5.8 13.7 13.1 12.7 1.8 1.6 1.7 1.9 2.06 Source: Company data, Credit Suisse estimates OUTPERFORM rating reflects current stock undervaluation We offer a three-pronged rationale for assigning an OUTPERFORM rating to the stock: (1) Current share price does not we expect it to deliver attractive income growth, with a total yield in FY3/18 based on our reflect projected total yield earnings forecasts of 5.5% (dividend yield 2.7%, return from buybacks 2.9%); (2) projected or potential for relatively fast growth in OP is faster than other construction sector stocks that we cover; and (3) we also earnings growth see scope for improvement in gross margins over the next three years due to increasing demand for base station infrastructure for the rollout of new, faster networks (4G and 5G). The stock is only trading on a prospective P/E of 10.5x based on forecast FY3/18 earnings, at the bottom of the post-2008 range for this valuation multiple. We think the current share price reflects neither the high total yield nor the scope for future gross margin improvement. Comsys also appears undervalued relative to break-up value, with a P/B of less than 1.0x based on our FY3/18 forecasts. We see it outperforming the construction sector.

Figure 2: Consolidated earnings summary Sales Operating profit Recurring profit Net profit EPS ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) Consolidated Mar-16 Actual 320,654 (2.4) 23,849 (13.8) 24,223 (13.9) 15,420 (8.0) 139.2 (4.9) Mar-17 CS E 342,700 6.9 25,700 7.8 26,100 7.7 17,100 10.9 159.0 14.2 CoE 340,000 6.0 25,000 4.8 25,500 5.3 16,000 3.8 144.5 3.8 Shikiho E 340,000 6.0 25,000 4.8 25,500 5.3 16,000 3.8 141.7 1.8 IBES E 340,500 6.2 25,300 6.1 - - 18,700 21.3 147.9 6.2 Mar-18 CS E 350,400 2.2 27,000 5.1 27,500 5.4 17,800 4.1 170.8 7.4 Shikiho E 345,000 1.5 26,500 6.0 27,000 5.9 16,800 5.0 148.8 5.0 IBES E 345,500 1.5 25,700 1.6 - - 18,950 1.3 152.2 2.9 Mar-19 CS E 351,600 0.3 28,100 4.1 28,600 4.0 18,500 3.9 183.3 7.3 IBES E 348,667 0.9 25,167 -2.1 - - 19,367 2.2 153.0 0.5 Source: Company data, Toyo Keizai "Shikiho" (Japan Company Handbook), I/B/E/S, Credit Suisse estimates

Comsys Holdings (1721 / 1721 JP) 3 16 August 2016

Share price performance In absolute terms, the share price corrected between December 2000 and December 2002, Expecting stock to but rallied after that. Relative to TOPIX, the shares performed poorly until December 2002, outperform TOPIX but have gradually improved since then. Comsys stock performed virtually in line with the Construction Index TOPIX Construction Index from 2008 to 2014, but has since underperformed that index. We expect the shares to outperform the TOPIX Construction Index.

Figure 3: Absolute share prices (Dec, 2000=100) Figure 4: Relative share prices (Dec, 2000=100) 250 120 COMSYS HOLDINGS KYOWA EXEO NTT NTT DOCOMO INC 100 200 TOPIX CONSTRUCTION INDEX TOPIX

80 150 60 100 40

50 20 COMSYS HOLDINGS KYOWA EXEO COMSYS HDS/TOPIX

0 0

Jul-01 Jul-08 Jul-15

Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 Apr-12 Apr-14 Apr-16

Oct-06 Oct-13

Apr-03 Apr-10

Jun-04 Jan-05 Jun-11 Jan-12

Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14

Aug-11 Aug-01 Aug-03 Aug-05 Aug-07 Aug-09 Aug-13 Aug-15

Feb-02 Mar-06 Feb-09 Mar-13 Feb-16

Dec-00 Sep-02 Nov-03 Aug-05 Dec-07 Sep-09 Nov-10 Aug-12 Dec-14 May-14 May-07 Source: Thomson Reuters, Credit Suisse Source: Thomson Reuters, Credit Suisse

Comsys Holdings (1721 / 1721 JP) 4 16 August 2016 Target price and valuation We base our ¥2,400 target price on FY3/18E EPS of ¥171 and a prospective P/E of 14.0x. TP of ¥2,400 based on Based on this target price, we estimate a projected total yield in FY3/18 of 5.5% (made up FY3/18E EPS of ¥171 and of a 2.7% dividend yield and 2.9% return from share buybacks). P/E of 14x A P/E of 14.0x would approach the upper end of Comsys's P/E range since April 2013, so we assume that its multiple will rise to at least the upper bound of this range. This period was marked by generally elevated equity investor interest in Japanese general contractors. As a result, we saw a rally in those stocks benefiting from either (1) a swelling order book from public-sector clients and private manufacturers or (2) increasing gross margins. The valuation metrics for Comsys stayed flat, however, reflecting its relatively steady sales and gross margins. Looking ahead, though, our analysis assumes that equity investors will turn their interest to stocks offering higher total shareholder returns (including share buybacks). Moreover, the increase in orders for new network investment (4G/5G) over the next three years implies growth in earnings at Comsys. Given that 4G project orders began arriving in FY3/16, we think the use of the actual P/E for this period is appropriate.

Figure 5: P/E (12-month forward) (bn yen) 25.0 PER(LHS) Sales in mobile segment (RHS) 100 90 (CS.E) 20.0 80 70 15.0 60 14.0 50 10.0 40 10.8 30 5.0 20 3G 3.5G 3.9G 4G 5G 10

0.0 0

09/2007 09/2009 03/2006 09/2006 03/2007 03/2008 09/2008 03/2009 03/2010 09/2010 03/2011 09/2011 03/2012 09/2012 03/2013 09/2013 03/2014 09/2014 03/2015 09/2015 03/2016 09/2016 03/2017 09/2017 03/2018 09/2018 03/2019

Source: Thomson Reuters, Credit Suisse Higher total yield and faster OP growth than other construction sector stocks In this section we compare our valuation of Comsys to that of the other construction sector More attractive total returns stocks that we cover: Taisei (1801), Obayashi (1802), Shimizu (1803), Kajima (1812), and and OP growth than other Penta-Ocean Construction (1893). We believe Comsys is more attractive than any of construction sector stocks these stocks in terms of its projected dividend yield, total returns, and OP growth over the period of FY3/17 to FY3/19. We forecast a dividend yield of 2.5% and total return including share buybacks of 5.2% for Comsys in FY3/17. In contrast, the average projected dividend yield for other construction sector stocks that we cover is 1.9%, and the projected total return is 2.6%. Clearly Comsys looks a more attractive investment on this basis. Our projected OP growth in FY3/17 is 7.8% for Comsys, compared with 3.7% for the other stocks in our coverage universe. We expect Comsys to generate faster OP growth than the rest of the sector in FY3/18 and FY3/19 as well. Despite these attractive valuation factors, Comsys is currently trading on a P/E of just 10.6x, at the bottom of the post-2008 range for this indicator and significantly lower than the average current P/E of 11.2x for the other construction stocks in our coverage universe. We conclude that Comsys is undervalued at its current share price.

Comsys Holdings (1721 / 1721 JP) 5 16 August 2016

Figure 6: Comsys Holdings and other construction companies in our coverage 8.0% 9.0% 4.0% Comsys HDS Comsys HDS 7.8% Comsys HDS 8.0% 3.5% 7.0% Average of our coverage Average of our coverage Average of our coverage 3.0% 5.9% 6.0% 5.5% 7.0% 3.0% 2.7% 5.2% 2.5% 2.5% 2.5% 6.0% 2.5% 5.0% 5.1% 5.1% 5.0% 1.9% 2.0% 4.0% 4.1% 4.0% 3.7% 1.5% 3.0% 2.6% 2.5% 2.5% 3.0% 2.3% 1.0% 2.0% 2.0% 0.5% 1.0% 1.0%

0.0% 0.0% 0.0% FY17/3 CS.E FY18/3 CS.E FY19/3 CS.E FY17/3 CS.E FY18/3 CS.E FY19/3 CS.E FY17/3 CS.E FY18/3 CS.E FY19/3 CS.E Dividend yield Total yield OP increase

Source: Company data, Credit Suisse estimates Reliable performance Consistently impressive orders and profits One of the key characteristics of Comsys in our opinion is the reliability of its performance Reliable performance is a metrics. Consolidated annual orders have typically been in the range of ¥280–340bn. hallmark of Comsys Comsys has been making consistent operating margin improvements since FY3/13 based on its cost-reduction program. The operating margin is now in excess of 7%.

Figure 7: Consolidated orders Figure 8: Consolidated OP and NP (
bn) 300 (
bn) 9.0% 400 Operating profit 350 356 356 336 337 350 332 320 328 332 250 Net profit 7.5% 294 298 300 285 OP margin (RHS) 200 6.0% 250

200 150 4.5%

150 100 3.0% 100 50 1.5% 50

0 0 0.0%

CS.E CS.E CS.E

CS.E CS.E CS.E

03/2011 03/2008 03/2009 03/2010 03/2012 03/2013 03/2014 03/2015 03/2016 03/2017 03/2018 03/2019

03/2007 03/2008 03/2009 03/2010 03/2011 03/2012 03/2013 03/2014 03/2015 03/2016 03/2017 03/2018 03/2019 03/2006 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Gross margin Comsys has consistently achieved gross margins of 10–15% since FY3/18, reflecting (1) Gross margin consistently in the relative lack of competition in its field, which enables it to secure fatter margins on 10–15% range projects, and (2) the relatively stable cost structures for telecoms engineering projects. The gross margin of Kyowa exeo, a peer of Comsys, for FY3/16 was 12.5%. Kyowa Exeo (1951) and Comsys’s gross margins have been stable since March 2008. Telecoms engineering companies garner high market shares in regions where they have strong footholds. As a result, we see little business competition in engineering work for NTT. The situation is different for other types of construction companies, which constantly compete for orders. We expect the market to recognize Comsys's stable dividend yield and total yield. Earnings stability is key to maintaining yields; given the steady gross margins of Comsys and its peers, we think they may appeal more than other construction companies in terms of shareholder returns.

Comsys Holdings (1721 / 1721 JP) 6 16 August 2016

Figure 9: Orders and gross margin (mn yen) Order of ComsysHDS (RHS) 400,000 GPM of ComsysHDS (RHS) 20.0% average GPM% in construction work of Big4 380,000 GPM of Kyowa Exeo (RHS) 18.0% 14.6% 360,000 14.0% 14.3% 16.0% 13.8% 13.7% 13.0% 13.5% 340,000 12.6% 12.8% 14.0% 11.5% 320,000 10.7% 10.5% 12.5% 10.5% 10.8% 12.0% 11.7% 12.0% 12.1% 11.9% 300,000 11.7% 11.2% 10.0% 9.8% 9.8% 10.3% 280,000 9.9% 8.0% 8.3% 260,000 6.8% 6.0% 6.2% 240,000 5.0% 5.2% 4.0% 4.4% 4.4% 220,000 2.7% 2.0%

200,000 0.0%

CS.E CS.E CS.E

03/2009 03/2010 03/2011 03/2012 03/2013 03/2014 03/2015 03/2016 03/2017 03/2018 03/2019 03/2008 Source: Company data, Credit Suisse estimates Subsidiaries and business segments Comsys Group comprises six major subsidiaries Six subsidiaries operate under the Comsys Holdings umbrella, each in a different business Five of six main subsidiaries area (Figure 9). The core subsidiary, Nippon Comsys, mainly handles engineering work for responsible for most of NTT. The other major subsidiaries are Sanwa Comsys Engineering (non-NTT facilities), Comsys’ business Tosys (access infrastructure for NTT in Hokuriku), Tsuken (access infrastructure for NTT in Hokkaido), Comsys Joho System (ICT solutions), and Comsys Shared Services (supplying finance, accounting and other services to Comsys Holdings businesses).

Figure 10: Major subsidiaries and their businesses

COMSYS HDS ※Left 5-company is Major 5

Nippon SANWA COMSYS COMSYS JOHO COMSYS Engineering TOSYS TSUKEN COMSYS Corporation SYSTEM Shared Services Mainly NTT Mainly NCC Mainly Access Mainly Access ICT Solution business, Financial management in Engineering Engineering business in business in etc Corporate group business Hokuriku Area business Hokkaido Area Source: Company data, Credit Suisse Nippon Comsys: The core subsidiary Nippon Comsys generated 64% of consolidated sales and 76% of OP in FY3/16. The largest subsidiary Nippon Comsys generates some 60%

of sales and 80% of OP

Comsys Holdings (1721 / 1721 JP) 7 16 August 2016

Figure 11: FY3/16 sales weighting by subsidiary Figure 12: FY3/16 OP weighting by subsidiary COMSYS Others, 0% COMSYS Others, 1% JOHO JOHO SYSTEM, SYSTEM, 2% 3% TSUKEN, TSUKEN, 14% 10% TOSYS, 5%

TOSYS, 7% SANCOM, 5%

Nippon SANCOM, COMSYS, 13% 64% Nippon COMSYS, 76%

Source: Company data, Credit Suisse Source: Company data, Credit Suisse Four main business segments The four business segments engage in (1) telecoms engineering work for NTT, (2) other Segments are NTT network infrastructure projects, (3) ICT solutions, and (4) social infrastructure-related engineering, non-NTT operations. engineering, ICT solutions and social infrastructure The first business segment comprises construction and engineering project work on wired and wireless telecoms networks for the NTT Group. The segment is further subdivided into access, network and mobile operations. Access operations are engineering works that involve physical relocation or modification of telecoms network assets, including replacement of telephone poles and the maintenance or repair of optical fiber networks. Network operations include the conversion of fixed-line networks to IP networks. Mobile operations include the installation of equipment such as base stations and wireless LAN equipment related to mobile network construction, and wireless signal quality testing. The second business segment is functionally virtually identical to the first, except that the telecoms carrier ordering the services is KDDI (9433) or Softbank (9984) rather than NTT. The ICT solutions business involves partnering with a systems vendor such as Dell to offer systems design, installation and repair services to companies, schools and other clients. The social infrastructure-related business covers the operations not included in the other segments. It includes consulting services for systems used to (1) monitor or predict natural disasters, including earthquakes, typhoons and monsoons, and (2) generate power from renewable sources. Facilities management services are also reported in this segment.

Comsys Holdings (1721 / 1721 JP) 8 16 August 2016

Figure 13: Overview of each segment Constructs digital communication facilities for configuring wired/wireless networks for the NTT Group. In recent years, contracted NTT Facilities Installation Business to operate facilities (maintenance and repair duties) in certain areas. Segments are broken down into the following categories: access, networks, and mobile.

Carries out utility pole replacement and electrical facilities construction associated with moving office locations. Also, carries out Access optical fiber maintenance, repair, etc.

Networks Handles arrangements with Internet providers and telephone companies.

Visits customers that require LTE-related construction. Future outlook: Comsys will cut back on 3.5G-related construction and Mobile take orders for 4G- and 5G-related construction. They will also take orders for add-on cells.

For digital communication providers other than NTT, Comsys ,mainly Sanwa-comsys, performs construction work for digital NCC Facilities Installation Business communication facilities for configuring wired and wireless networks, CATV, and auxiliary facilities. Their main customers are KDDI and Softbank.

Submits proposals/recommendations and offers services to companies. This ranges from plans and proposals to maintenance ICT Solutions Business services in conjunction with Dell and other software/system vendors.

Carries out civil communication and general civil engineering construction and also design and installation of electrical equipment for facilities, buildings, etc. This includes the building and construction of buildings, warehouses, factories, etc.; installation of Social Infrastructure Business, etc. equipment for prevention/projection against natural disasters; and environment/ecology-related businesses including solar power systems and urban infrastructure businesses. Source: Company data, Credit Suisse

Comsys Holdings (1721 / 1721 JP) 9 16 August 2016 Detailed earnings forecasts Expecting OP growth to continue We forecast consolidated OP of ¥25.7bn (+7.8% YoY; guidance ¥25bn; I/B/E/S consensus Our consolidated OP ¥25.3bn) in FY3/17, ¥27.0bn (+5.1%; I/B/E/S ¥25.7bn) in FY3/18, and ¥28.1bn (+4.1%; forecasts are above I/B/E/S ¥25.2bn) in FY3/19. consensus at ¥25.7bn (FY3/17), ¥27.0bn (FY3/18), Anticipating slight growth in consolidated orders in FY3/17 and FY3/18 and ¥28.1bn (FY3/19) We forecast consolidated orders of ¥349.7bn (+5.4% YoY) in FY3/17, ¥350.8bn (+0.3%) in Expecting slight growth in FY3/18, and ¥352.1bn (+0.4%) in FY3/19. Breaking this down, we expect total orders for consolidated orders in next the five largest subsidiaries of ¥294.0bn (−0.1% YoY) in FY3/17, ¥295.1bn (+0.4%) in two years FY3/18, and ¥296.4bn (+0.4%) in FY3/19, and have also assumed flat aggregate orders of ¥55.7bn for other subsidiaries. We forecast a 5.4% increase in consolidated orders in FY3/17 despite a 0.1% dip in aggregate orders for the five largest subsidiaries. The difference is due to the April 2016 acquisition via share exchange of Tokyo Hoso Kogyo. According to the current guidance for FY3/17, the latter company is expected to book sales of ¥14.2bn and RP of ¥0.7bn. Comsys plans to amortize ¥0.9bn in positive goodwill from the deal in equal amounts over five years. Projected growth in consolidated gross profit in period to FY3/19 We have assumed consolidated gross margins of 13.7% in FY3/17, 14.0% in FY3/18, and Growth expected in 14.3% in FY3/19. We think the combination of high profit margins in mobile operations and consolidated gross profit out the increasing sales from this segment will help to push up the consolidated gross margin. to FY3/19 We forecast consolidated gross profit of ¥46.9bn (+8.1% YoY) in FY3/17, ¥49.1bn (+4.7%) in FY3/18, and ¥50.3bn (+2.4%) in FY3/19. Segment breakdown for five largest subsidiaries Our segment breakdown for aggregate orders for the five largest subsidiaries is as follows: ¥174.5bn (−6.6% YoY) in FY3/17, ¥175.6bn (+0.6%) in FY3/18, and ¥176.9bn (+0.7%) in FY3/19 for NTT engineering; and a constant level of orders of ¥25.5bn during this period for non-NTT engineering work, plus corresponding figures of ¥45.0bn for ICT solutions and ¥49.0bn for social infrastructure-related operations.

Figure 14: Orders at five largest subsidiaries Figure 15: Breakdown of orders (￥bn) 100% 3,500 Social System- 90% Social System- Related and Other 3,000 Related and Other 80% IT Solution business IT Solution 2,500 70% business 60% NCC Engineering 2,000 NCC Engineering 21.9% 23.9% 22.1% business business 50% 21.3% 20.4% 23.3% 24.5% 1,500 Mobile Mobile 40% 30% 1,000 Network Network 20% 34.8%

500 31.3% 32.0% 33.1% 32.1% 30.9% 30.2% Engineering

10% NTT Engineering NTT Access Access

0 0%

CS.E CS.E CS.E

CS.E CS.E CS.E

03/2016 03/2013 03/2014 03/2015 03/2017 03/2018 03/2019

03/2014 03/2015 03/2016 03/2017 03/2018 03/2019 03/2013 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Comsys Holdings (1721 / 1721 JP) 10 16 August 2016

Assuming mobile operations the only growth sector within NTT engineering segment Within the NTT engineering segment, we assume breakdowns of orders by operations is Mobile only growth sector in as follows: ¥94.5bn (−2.9% YoY) in FY3/17, ¥92.6bn (−2.0%) in FY3/18, and ¥90.7bn NTT engineering segment (−2.1%) in FY3/19 for access operations; ¥20.0bn (−18.4%) in FY3/17, ¥18.0bn (−10.0%) due to shift to faster in FY3/18, and ¥16.2bn (−10.0%) in FY3/19 for network operations; and ¥60.0bn (−7.7%) networks in FY3/17, ¥65.0bn (+8.3%) in FY3/18, and ¥70.0bn (+7.7%) in FY3/19 for mobile operations. In mobile operations, we expect a high level of future demand from NTT DoCoMo for the construction of base stations as the carrier upgrades to 4G and 5G networks. The Ministry of Internal Affairs and Communications (MIC) has issued a standards roadmap including an assumed transition to 5G ahead of the Olympic Games in Tokyo in 2020. We think this will translate into increased 5G-related project orders for Comsys in FY3/18 and FY3/19.

Figure 16: Order breakdown by business for five largest Figure 17: Order breakdown of NTT business (FY3/16) subsidiaries (FY3/16)

NTT Social System Related and Other Engineering 14% Network Other business NTT Access 8% subsidaries Major 5 56% 33% subsidaries IT solution Engineering 11% business business 89% 14% 63% Mobile 22%

NCC Engineering NCC Engineering business business 9% Social System- 8% Related and Other IT solution business 12% 13%

Source: Company data, Credit Suisse Source: Company data, Credit Suisse Demand assumptions for NTT engineering segment Expecting growth in mobile operations due to demand for 4G/5G infrastructure In the NTT engineering segment, we expect orders in mobile operations to reach ¥60.0bn Expecting mobile operations in FY3/17, ¥65.0bn in FY3/18, and ¥70.0bn in FY3/19. orders of ¥60.0bn in FY3/17, ¥65.0bn in FY3/18, and These figures assume a high level of investment by NTT DoCoMo in base stations needed ¥70.0bn in FY3/19 for 4G and 5G networks. 4G network investment likely to remain high in FY3/17 after peaking in FY3/16 While demand probably peaked in FY3/16, we think orders for 4G network infrastructure Anticipating demand for 4G will remain high in FY3/17, supporting a high level of orders in mobile operations. networks to support high mobile orders in FY3/17 NTT DoCoMo launched its Premium 4G service in June 2016. In practice, the shift to 4G enables carriers to consolidate the three existing frequency bands (at 2GHz, 1.7GHz, and 800MHz) into one while raising network transmission speeds. According to the disclosures by NTT DoCoMo regarding FY3/16, the number of base stations servicing the Premium 4G service increased 25-fold during the year, from 900 at the end of March 2015 to 22,800 at the end of March 2016. For Comsys, this translated into an increase of 4.5% YoY in orders for mobile operations to ¥65.0bn in FY3/16, despite the decline of about 10% in NTT DoCoMo’s total capex during the same year. Evidently, the mobile carrier restricted its capital investment in other sectors while focusing more resources on 4G.

Comsys Holdings (1721 / 1721 JP) 11 16 August 2016

Figure 18: NTT DoCoMo capex Figure 19: Mobile business orders (bn yen) Others Telecommunications business (bn yen) 900 LTE& FOMA 80 71 67 800 754 70 65 727 703 62 662 60 700 60 55 595 585 600 314 333 50 334 254 500 230 246 40 400 30 300 200 413 421 408 20 370 366 339 100 10 0 0 03/2012 03/2013 03/2014 03/2015 03/2016 03/2017 03/2012 03/2013 03/2014 03/2015 03/2016 03/2017 Co.E Co.E

Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Figure 20: NTT DoCoMo capex and Comsys Holdings mobile business orders (bn yen) (bn yen) 1,000 95 950 Capex of NTT DoCoMo (LHS) 90 900 Orders in Mobile business (RHS) 85 850 80 800 75 750 70 700 650 65 600 60 550 55

500 50

Co.E

CS.E CS.E

03/2012 03/2007 03/2008 03/2009 03/2010 03/2011 03/2013 03/2014 03/2015 03/2016 03/2017 03/2018 03/2019 03/2006 Source: Company data, Credit Suisse estimates We assume 5G base station capex will yield growth in FY3/18 and FY3/19 and then around 2022 We expect that once demand from 4G network investment has receded, the transition to We expect orders to grow 5G will push up orders for Comsys mobile operations again. MIC has discussed with the 5–20% in FY3/18 and industry plans for a transition to 5G ahead of the Olympic Games in Tokyo in 2020. FY3/19 and then around According to a report by our electronic component analyst Akinori Kanemoto, 5G in the 2022 due to 5G base runup to 2020 (Part 1): Standardization and specification, mobile phone carriers are likely stations to install small cells for 5G networks in and around Tokyo in the lead-up to the Tokyo Olympics. He believes the installation of small cells will gain momentum nationwide from around 2022. We think this outlook for rising demand in an area with high margins for Comsys should give investors confidence to buy the stock. Figure 20 shows the sales variation for mobile operations in the NTT engineering segment as mobile network speeds have migrated. The business has recorded higher sales in each of the years when the transition to a more advanced network standard occurred. In FY3/07, when the transition to 3.5G occurred, sales by mobile operations rose around 20% YoY to ¥90.2bn. During the 3.9G transition, sales rose around 20% in FY3/14 to ¥66.8bn and about 5% to ¥71.2bn in FY3/15. As a result, we assume an increase of ¥5bn in orders in FY3/18, to ¥65.0bn, which we expect to produce a ¥5bn increase in sales to ¥70.0bn in FY3/19. We expect small cell nodes to be adopted for 4G and 5G mobile network infrastructure. The value of each installation is likely to be low, but we believe the increase in the number of required nodes will drive sales growth. In FY3/07, when 3G infrastructure was rolled out

Comsys Holdings (1721 / 1721 JP) 12 16 August 2016 in Japan, the company’s mobile operations booked sales of ¥90.2bn. However, we do not expect sales from 4G and 5G to reach that level.

Figure 21: Sales by NTT Engineering’s mobile business

(bn yen) 100 90.2 90

80 75.4 71.2 70.3 70 70 75.5 65 65 60.4 66.8 60 60 62.2 55.1 50 54.3 40 3G 3.5G 3.9G 4G 5G

30

CS.E CS.E CS.E CS.E

03/2008 03/2006 03/2007 03/2009 03/2010 03/2011 03/2012 03/2013 03/2014 03/2015 03/2016 03/2017 03/2018 03/2019 03/2022

Source: Company data, Credit Suisse estimates

Figure 22: Installation work examples

Antenna installation Relay station installation LTE base station installation Source: Company website, Credit Suisse

Comsys Holdings (1721 / 1721 JP) 13 16 August 2016

Figure 23: System structure of small cell installation

several small cells within a

macrocell area Frequency

Small Small cell Small cell Small cell cell

Macrocell Macrocell band

communication communication communication communication speed improve speed improve speed improve speed improve

Source: NTT DoCoMo, Credit Suisse Assuming demand attrition in access operations (2%) and network operations (10%) Over the period to FY3/19, we have assumed that orders will decline consistently by about Assuming orders will taper 2% per year in access operations and by about 10% per year in network operations. Since off in access and network the access business mainly involves telephone pole rebuilding and relocation of physical operations assets, demand does not naturally increase over time. We have assumed a rate of annual demand attrition of 2%. In network operations, where the past decade has seen Comsys converting exchanges to handle IP telephony, we expect demand to taper off as well. For this sector, we have assumed a rate of annual demand attrition of 10%. Expecting sales booked on orders in same or following fiscal year Unlike the general contractors that we also cover, Comsys can generally book sales fairly Sales are booked in same soon against a project after the order is received. In most cases, the sales are booked in (or following) year as project the same fiscal year as the order is received. order in most cases Distinct differences in quarterly distribution of orders and sales Figures 23–24 illustrate the quarterly contributions to annual sales and orders over the More sales tend to be past two fiscal years. While the orders are recorded fairly evenly throughout the year, with booked in 2H each quarter contributing around 25% of the total, the sales are more heavily concentrated in 2H, and in 4Q in particular. The basic practice of ensuring that all outstanding orders are processed before the year-end results in a marked concentration of sales in 2H. Our FY3/17 sales forecast reflects this bias, with 42% in 1H and 58% in 2H.

Comsys Holdings (1721 / 1721 JP) 14 16 August 2016

Figure 24: Quarterly contributions to annual orders Figure 25: Quarterly contributions to annual sales 100.0% 100.0% 90.0% 90.0% 26% 26% 33% 37% 80.0% 50% 80.0% (2H) 58% 70.0% 70.0% (2H) 23% 60.0% 25% 4Q 60.0% 4Q 23% 50.0% 3Q 50.0% 23% 3Q 2Q 2Q 40.0% 26% 40.0% 25% 1Q 24% 1Q 30.0% 50% 30.0% 22% (1H) 42% 20.0% 20.0% (1H) 25% 24% 10.0% 10.0% 20% 18% 0.0% 0.0% FY3/2015 FY3/2016 FY3/2017 (CS.E) FY3/2015 FY3/2016 FY3/2017 (CS.E) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Risks Downside risks to the share price include: (1) a delay to the start of 5G services beyond Key downside risk factors 2020, resulting in failure to win 5G orders from NTT DoCoMo in FY3/18 and FY3/19, (2) include higher labor costs, a rising labor costs, and (3) a decline in orders. Further risks include (4) lack of apparent fall-off in orders, EPS earnings contribution from targets of M&A deals via stock exchanges and (5) a change in decline due to M&A and so NTTs readiness to place orders with Nippon Comsys. on For risk (1), our estimates assume Comsys will secure 5G orders in FY3/18 and FY3/19. However, earnings are likely to decline if the Ministry of Internal Affairs and Communications decides to push back its current 2020 target for the start of 5G services, resulting in delayed orders for Comsys. For risk (2), we note higher labor costs as the job offers-to-applicants ratio rises would likely push down the gross margin. Risk (3) concerns a possible drop in orders as base-station projects due to adoption of new telecoms standards taper off. Risk (4) means the share price could fall if Comsys uses treasury stock for an M&A stock swap and the merged company makes little earnings contribution, resulting in lower EPS. On risk (5), we note the NTT group is Comsys HD's main customer and that Nippon Comsys, which does most of its business with NTT, generates about 60% of Comsys HD's sales and 70–80% of its OP. This leaves the risk of share price deterioration if NTT scales back Comsys orders. Shareholder returns Annual share buybacks of ¥5bn set to continue, supporting total yield of 5.1–5.9% Comsys has not set any specific target for shareholder returns. The rather vague dividend Dividend payout ratio of policy commits the company only to paying stable and consistent dividends commensurate 28%/28%/29%, returns from with performance. The dividend payout ratio has been in the 17.9–35.3% range over the share buybacks of past five years, while returns from share buybacks have been between 30.2% and 52.1%. 32%/32%/31% in FY3/17, The aggregate return including dividends and share buybacks has been 48.7–77.2%. FY3/18 and FY3/19 We expect Comsys to continue conducting annual share buybacks of around ¥5bn. We expect a total return ratio of roughly 60% in FY3/17, FY3/18 and FY3/19, with the dividend payout ratio staying at 28% (rising to 29% in FY3/19) and returns from share buybacks staying at 32% (falling to 31% in FY3/19). The policy of Comsys is to cancel any surplus treasury stock once it exceeds 20% of total shares issued. We conclude the company is holding treasury shares equivalent to roughly 20% of issued share capital. Of course, these shares are also available as M&A currency.

Comsys Holdings (1721 / 1721 JP) 15 16 August 2016

Increase in dividend payout ratio on the table as potential differentiating factor We think Comsys could consider increasing the dividend payout ratio, given the stability of The time has come to its earnings and the high shareholders’ equity ratio. consider boosting shareholder returns by We expect that over the next three years the general contractors will follow the lead of increasing the payout ratio Taisei by announcing a share buyback program (Taisei plans one in FY3/17). This would reduce the relative attractiveness of Comsys within the construction sector. Stock market investors could also start to demand a boost to the payout ratio, given that Daito Trust Construction (1878) offers a total return of 80%. We think the time has come for Comsys management to give serious consideration to bolstering shareholder returns through a higher payout ratio.

Figure 26: Shareholder returns (payout ratio and buybacks) Payout ratio by share buybacks 120.0% 105.9% Payout ratio 100.0% Total Payout ratio 77.7% 77.2% 77.2% 80.0% 63.4% 66.9% 68.0% 70.5% 58.7% 60.0% 60.0% 60.0% 60.0% 48.7% 41.8% 51.7% 52.1% 29.5% 47.5% 32.0% 32.0% 31.0% 40.0% 43.4% 31.5% 49.0% 22.2% 30.2% 0.9% 10.1% 20.0% 35.4% 35.3% 26.0% 27.2% 25.1% 28.0% 28.0% 29.0% 21.2% 19.4% 19.9% 18.5% 17.9% 20.5%

0.0%

CS.E CS.E CS.E

03/2006 03/2009 03/2012 03/2015 03/2007 03/2008 03/2010 03/2011 03/2013 03/2014 03/2016 03/2017 03/2018 03/2019

Source: Company data, Credit Suisse estimates

Figure 27: Shareholder returns (mn yen) 14,000 Buybacks Total dividend

12,000

10,000

8,000 5,700 7,958 8,032 5,700 5,500 6,000 8,025 5,200 5,006 5,056 4,013 4,000 3,002 3,000 93 1,250 4,800 5,000 2,000 3,545 3,402 3,900 2,397 2,128 2,382 2,697 2,589 2,511 2,597 2,504 2,423

-

CS.E CS.E CS.E

03/2006 03/2009 03/2012 03/2015 03/2007 03/2008 03/2010 03/2011 03/2013 03/2014 03/2016 03/2017 03/2018 03/2019

Source: Company data, Credit Suisse estimates

Comsys Holdings (1721 / 1721 JP) 16 16 August 2016 Forecasts and valuation

Figure 28: Order forecasts for five largest subsidiaries 14/03 15/03 16/03 17/03 17/03 18/03 19/03 mil yen Co.E CS.E CS.E CS.E Orders received 297,400 291,400 294,400 294,000 294,000 295,100 296,400 NTT Engineeringi business 189,000 177,200 186,800 174,500 174,500 175,600 176,900 Access 93,000 93,200 97,300 94,500 94,500 92,600 90,700 Network 24,800 21,800 24,500 20,000 20,000 18,000 16,200 Mobile 71,200 62,200 65,000 60,000 60,000 65,000 70,000 NCC Engineering business 39,500 34,000 26,700 25,500 25,500 25,500 25,500 IT Solution business 42,100 44,000 41,300 45,000 45,000 45,000 45,000 Social System and Other 26,600 35,900 39,200 49,000 49,000 49,000 49,000

(Reference）Orders by Major subsidiaries group（before offset internally） Nippon COMSYS-G 208,800 219,100 219,500 SANCOM-G 57,400 54,100 45,100 TOSYS-G 28,500 28,600 29,700 TSUKEN-G 39,500 41,000 42,300

Orders received (YoY) NTT Engineeringi business -3.3% -6.2% 5.4% -6.6% -6.6% 0.6% 0.7% Access -12.3% 0.2% 4.4% -2.9% -2.9% -2.0% -2.1% Network 10.2% -12.1% 12.4% -18.4% -18.4% -10.0% -10.0% Mobile 6.6% -12.6% 4.5% -7.7% -7.7% 8.3% 7.7% NCC Engineering business -16.0% -13.9% -21.5% -4.5% -4.5% 0.0% 0.0% IT Solution business 5.0% 4.5% -6.1% 9.0% 9.0% 0.0% 0.0% Social System and Other 19.3% 35.0% 9.2% 25.0% 25.0% 0.0% 0.0% Source: Company data, Credit Suisse estimates

Figure 29: Consolidated orders and sales forecasts 14/03 15/03 16/03 17/03 17/03 18/03 19/03 mil yen Co.E CS.E CS.E CS.E Orders breakdown by business 327,900 336,900 331,900 350,000 349,700 350,800 352,100 NTT Engineeringi business 192,900 179,000 188,400 176,500 176,500 177,600 178,900 NCC Engineering business 39,100 33,700 26,900 25,500 25,500 25,500 25,500 IT Solution business 52,800 55,100 52,200 57,500 55,500 55,500 55,500 Social System and Other 43,000 68,900 64,400 90,500 92,200 92,200 92,200

Orders breakdown by business (YoY) -2.3% 2.7% -1.5% 5.5% 5.4% 0.3% 0.4% NTT Engineeringi business -3.2% -7.2% 5.3% -6.3% -6.3% 0.6% 0.7% NCC Engineering business -16.5% -13.8% -20.2% -5.2% -5.2% 0.0% 0.0% IT Solution business 4.8% 4.4% -5.3% 10.2% 6.3% 0.0% 0.0% Social System and Other 10.8% 60.2% -6.5% 40.5% 43.2% 0.0% 0.0%

Backlog breakdown by business 89,831 98,100 109,400 119,400 116,400 116,800 117,300 NTT Engineeringi business 54,600 50,000 55,800 49,800 51,000 51,400 51,900 NCC Engineering business 6,100 4,200 3,900 2,400 3,300 3,300 3,300 IT Solution business 10,500 11,900 13,300 16,800 14,600 14,600 14,600 Social System and Other 18,400 31,900 36,200 50,200 47,300 47,300 47,300

Backlog breakdown by business (YoY) -3.7% 9.2% 11.5% 9.1% 6.4% 0.3% 0.4% NTT Engineeringi business -1.6% -8.4% 11.6% -10.8% -8.6% 0.8% 1.0% NCC Engineering business -47.9% -31.1% -7.1% -38.5% -15.4% 0.0% 0.0% IT Solution business 4.0% 13.3% 11.8% 26.3% 9.8% 0.0% 0.0% Social System and Other 17.2% 73.4% 13.5% 38.7% 30.7% 0.0% 0.0%

Completion rate by business 78.7% 77.0% 74.6% 74.0% 74.6% 75.0% 75.0% NTT Engineeringi business 78.0% 78.6% 76.6% 78.6% 78.0% 77.5% 77.5% NCC Engineering business 88.0% 89.4% 87.1% 91.8% 88.8% 88.5% 88.5% IT Solution business 83.3% 81.9% 79.1% 76.3% 78.8% 79.2% 79.2% Social System and Other 68.7% 63.5% 62.3% 60.4% 63.2% 66.1% 66.1%

Sales breakdown by business 331,341 328,631 320,654 340,000 342,700 350,400 351,600 NTT Engineeringi business 193,800 183,600 182,500 182,500 181,300 177,200 178,400 NCC Engineering business 44,700 35,600 27,100 27,000 26,100 25,500 25,500 IT Solution business 52,400 53,700 50,700 54,000 54,200 55,500 55,500 Social System and Other 40,300 55,400 60,000 76,500 81,100 92,200 92,200 Source: Company data, Credit Suisse estimates

Comsys Holdings (1721 / 1721 JP) 17 16 August 2016

Figure 30: Consolidated gross profit margin 14/03 15/03 16/03 17/03 17/03 18/03 19/03 mil yen Co.E CS.E CS.E CS.E Gross profit 45,770 47,938 43,389 46,500 46,900 49,100 50,300 (Reference）Orders by Major subsidiaries group（before offset internally） Nippon COMSYS-G 29,900 33,100 30,500 SANCOM-G 6,700 6,200 3,400 TOSYS-G 2,300 2,100 2,500 TSUKEN-G 4,900 4,800 5,200 Others 1,970 1,738 1,789

Gross profit margin 13.8% 14.6% 13.5% 13.7% 13.7% 14.0% 14.3% (Reference）Orders by Major subsidiaries group（before offset internally） Nippon COMSYS-G 14.6% 15.8% 14.5% SANCOM-G 10.9% 10.9% 8.0% TOSYS-G 7.6% 7.5% 8.8% TSUKEN-G 12.1% 11.8% 11.8% Others -5.4% -3.6% -3.9% Source: Company data, Credit Suisse estimates

Figure 31: Consolidated income statement 14/03 15/03 16/03 17/03 17/03 18/03 19/03 mil yen Co.E CS.E CS.E CS.E Sales 331,341 328,631 320,654 340,000 342,700 350,400 351,600 Gross profit 45,770 47,938 43,389 46,500 46,900 49,100 50,300 (% of Sales) 13.8% 14.6% 13.5% 13.7% 13.7% 14.0% 14.3% Selling, general and administrative 18,200 20,264 19,540 21,500 21,200 22,100 22,200 (% of Sales) 5.5% 6.2% 6.1% 6.3% 6.2% 6.3% 6.3% Operating profit 27,570 27,674 23,849 25,000 25,700 27,000 28,100 (% of Sales) 8.3% 8.4% 7.4% 7.4% 7.5% 7.7% 8.0% Non-operating profit and loss 508 448 373 500 400 500 500 Non-operating profit 611 702 662 600 700 700 Non-operating loss 103 254 289 200 200 200 Recurring profit 28,000 28,121 24,223 25,500 26,100 27,500 28,600 (% of Sales) 8.5% 8.6% 7.6% 7.5% 7.6% 7.8% 8.1% Extraordinary profit/loss (924) (838) (183) (200) (500) (500) Extraordinary profit 1,426 225 709 0 0 0 Extraordinary loss 2,427 1,064 893 0 0 0 Net profit before Tax 27,076 27,283 24,040 25,900 27,000 28,100 Tax expense 10,617 10,532 8,588 8,800 9,200 9,600 Effective tax rate 39.2% 38.6% 35.7% 34.0% 34.0% 34.0% Taxes 10,401 9,438 7,417 0 0 0 Adjustmens 215 1,093 1,170 0 0 0 Net profit 16,459 16,751 15,451 16,000 17,100 17,800 18,500 Minority interest 70 (16) 30 0 0 0 Profit attributable to parent's shareholders 16,389 16,767 15,420 16,000 17,100 17,800 18,500 Source: Company data, Credit Suisse estimates

Comsys Holdings (1721 / 1721 JP) 18 16 August 2016

Figure 32: Consolidated balance sheet 14/03 15/03 16/03 17/03 18/03 19/03 mil yen CS.E CS.E CS.E Current assets 156,495 151,878 155,551 160,800 165,300 169,200 Cash and deposit 31,036 33,496 28,930 32,100 33,900 37,300 (% of sales) 9.4% 10.2% 9.0% 9.4% 9.7% 10.6% Notes receivable , accounts receivable 97,667 93,513 102,559 102,800 105,100 105,500 (% of sales) 29.5% 28.5% 32.0% 30.0% 30.0% 30.0% Expense for uncompleted work 17,816 15,215 15,261 17,100 17,500 17,600 (% of sales) 5.4% 4.6% 4.8% 5.0% 5.0% 5.0% Deferred tax assets (current assets) 4,092 3,480 3,152 3,200 3,200 3,200 Others 5,884 6,174 5,649 5,600 5,600 5,600 Fixed assets 94,066 112,140 110,514 115,100 119,100 123,100 Tangible assets 70,353 72,295 72,878 77,500 81,500 85,500 Intangible assets 3,594 7,643 6,990 7,000 7,000 7,000 Investment and other assets 20,117 32,201 30,645 30,600 30,600 30,600 Investment securities 9,684 12,700 10,460 10,500 10,500 10,500 Others 2 1 1 0 0 0 Total assets 250,561 264,019 266,066 275,900 284,400 292,300

Current liabilities 63,720 60,791 61,225 63,400 64,600 64,700 Notes payable, Accounts payable 45,039 44,675 49,191 51,400 52,600 52,700 (% of sales) 13.6% 13.6% 15.3% 15.0% 15.0% 15.0% Short-term interest bearing debt 1,270 100 114 100 100 100 (% of sales) 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% Accrued income tax 6,847 3,852 3,296 3,300 3,300 3,300 Advances received on uncompleted contracts 1,018 1,540 710 700 700 700 (% of sales) 0.3% 0.5% 0.2% 0.2% 0.2% 0.2% Others 9,546 10,624 7,914 7,900 7,900 7,900 Fixed liabilities 7,426 9,189 8,296 8,300 8,300 8,300 Total allowance 4,577 4,006 3,945 3,900 3,900 3,900 Deferred tax liabilities ( Fixed liabilities) 428 2,982 2,186 2,200 2,200 2,200 Others 2,421 2,201 2,165 2,200 2,200 2,200 Total Liabilities 71,147 69,980 69,522 71,700 72,900 73,000 Total shareholder's equity 185,549 196,599 202,104 209,800 217,100 224,900 Accumulated other comprehensive income (7,315) (3,824) (6,724) (6,700) (6,700) (6,700) Equity warrant 478 500 542 500 500 500 Minority interests 701 762 621 600 600 600 Net assets 179,414 194,038 196,543 204,200 211,500 219,300 Total debt and net assets 250,561 264,019 266,066 275,900 284,400 292,300 Source: Company data, Credit Suisse estimates

Comsys Holdings (1721 / 1721 JP) 19 16 August 2016

Figure 33: Consolidated cash flow statement 14/03 15/03 16/03 17/03 18/03 19/03 mil yen CS.E CS.E CS.E Cash flows from operating activities 24,185 26,575 13,089 22,300 21,300 23,100 After-tax net income 16,389 16,767 15,420 17,100 17,800 18,500 Depreciation and amortization 4,426 4,672 5,009 5,000 5,000 5,000 Accounts receivable (1,088) 4,154 (9,046) (200) (2,300) (400) Expense for uncompleted work 989 2,601 (46) (1,800) (400) (100) Accounts payable 583 (364) 4,516 2,200 1,200 100 Advances received on uncompleted contracts (508) 522 (830) 0 0 0 Others 3,394 (1,777) (1,934) 0 0 0 Cash flows from investing activities (6,228) (11,882) (7,303) (9,600) (9,000) (9,000) Tangible assets (4,886) (7,079) (3,776) (9,600) (9,000) (9,000) Marketable securities 1,254 89 1,050 0 0 0 Others (3,850) (4,981) (5,627) 0 0 0 Cash flows from financing activities (10,511) (12,199) (11,307) (9,400) (10,500) (10,700) Short term interest bearing debt (390) (1,170) (8) 0 0 0 Long term interest bearing debt 0 0 (16) 0 0 0 Purchase of treasury stock (8,025) (7,958) (8,032) (5,500) (5,700) (5,700) Payment amount of dividends (2,423) (3,545) (3,402) (3,900) (4,800) (5,000) Others 327 474 151 0 0 0

Net increase in cash and cash equivalents 7,446 2,494 (5,521) 3,300 1,800 3,400 Source: Company data, Credit Suisse estimates

Figure 34: Consolidated valuation sheet 14/03 15/03 16/03 17/03 18/03 19/03 mil yen CS.E CS.E CS.E Net working capital 69,426 62,513 67,919 67,800 69,300 69,700 Fixed assets 7,426 9,189 8,296 8,300 8,300 8,300 Invested capital 76,852 71,702 76,215 76,100 77,600 78,000 Operating profit 27,570 27,674 23,849 25,700 27,000 28,100 Tax rate 39.2% 38.6% 35.7% 34.0% 34.0% 34.0% OP after tax (NOPAT) 16,759 16,991 15,329 16,962 17,820 18,546 ROIC 21.8% 23.7% 20.1% 22.3% 23.0% 23.8% # of shares outstanding (includes tresury stock, mil) 146 146 141 137 133 129 # of treasury shares 28 31 30 29 28 28 # of shares outstanding - tresury shares 118 115 111 108 104 101 % of treasury shares 19.4% 21.5% 21.5% 21.4% 21.4% 21.6% Current share price (¥) 1,618 1,485 1,738 1,797 1,797 1,797 Market capitalization 190,386 170,126 192,486 193,267 187,305 181,343 Interest-bearing debt 1,270 100 114 100 100 100 Cash and marketable securities 31,036 33,496 28,930 32,100 33,900 37,300 Net debt (29,766) (33,396) (28,816) (32,000) (33,800) (37,200) Enterprise value 160,620 0 163,670 161,267 153,505 144,143 EBITDA 31,996 32,346 28,858 30,700 32,000 33,100 EV/EBITDA (X) 5.0 0.0 5.7 5.3 4.8 4.4 EV/Sales (X) 0.48 - 0.51 0.47 0.44 0.41 EPS (¥) 139 146 139 159 171 183 EPS growth rate 28.9% 5.1% -4.9% 14.2% 7.4% 7.3% Dividend yield 1.5% 2.0% 2.0% 2.5% 2.7% 3.0% Total shareholder return 5.5% 6.5% 6.0% 5.2% 5.5% 5.9% ROE 9.2% 8.7% 7.9% 8.4% 8.5% 8.5% ROA (Net income / Total assets) 6.5% 6.4% 5.8% 6.2% 6.3% 6.3% ROA (EBITDA/Total assets) 12.8% 12.3% 10.8% 11.1% 11.3% 11.3% PER (X) 11.6 10.1 12.5 11.3 10.5 9.8 PBR (X) 1.07 0.88 0.99 0.95 0.89 0.83 BPS 1,515 1,683 1,764 1,888 2,019 2,162 Debt / net asset 0.007 0.001 0.001 0.000 0.000 0.000 Equity ratio 71.1% 73.0% 73.4% 73.6% 74.0% 74.6% DPS (¥) 25 30 35 45 48 53 Payout ratio 17.9% 20.5% 25.1% 28.0% 28.0% 29.0% Total payout ratio 66.9% 68.0% 77.2% 60.0% 60.0% 60.0% Source: Company data, Credit Suisse estimates

Comsys Holdings (1721 / 1721 JP) 20 16 August 2016 HOLT analysis HOLT indicates there is 26% potential upside. Comsys‘ CFROI hit a peak of 8% in FY3/13 and has subsequently fallen to the 6% level given declining margins and asset efficiency. This level of CFROI matches that of the broad Japanese construction industry which on strong margin improvement over the last two years has improved from the 2-4% which was long the norm. Despite a narrowing gap versus competitors, Comsys continues to be differentiated with a valuation profile that is more attractive than peers.

Figure 35: CFROI of Japan’s construction sector

Source: Company data, Credit Suisse, HOLT estimates

Figure 36: CFROI of Comsys Holdings

Source: Company data, Credit Suisse, HOLT estimates Focusing on development of future CFROI, from the new 6% CFROI base achieved in FY3/16, our estimates point to just slight erosion and suggests that CFROI will settle out in the 5.7% area, about 50 basis points ahead of cost of capital. With margins set to recover from 9.0% this year to 9.4% in FY3/19, offsetting growth in CFROI is a slight decline in capital efficiency given a near-term capex peak and the retention of capital, the latter despite an attractive combined payout ratio of about 55–60% for dividends and repurchase. The achievement of our scenario suggests 26% potential upside on the HOLT discounted cash flow model. Sensitivity is to changes in margin with a 100 basis point sustained increase in margins increasing valuation by about 17%. Sensitivity to top-line growth is more muted.

Comsys Holdings (1721 / 1721 JP) 21 16 August 2016

Figure 37: HOLT

COMSYS HOLDINGS CORPORATION(C) (1721) Current Price: JPY 1,839 Warranted Price: JPY 2,348 Valuation date: 09-Aug-16

Sales Growth (parallel % point change to forecasts) Mar 15A Mar 16A Mar 17E Mar 18E Mar 19E JPY -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % -0.8 -2.4 6.9 2.2 0.3

EBITDA Margin, % 10.0 9.2 9.0 9.1 9.4 -2.0% -13% -10% -8% -5% -1% Asset Turns, x 1.42 1.3 1.4 1.3 1.3

-1.0% 1% 5% 9% 13% 18% CFROI®, % 7.2 6.1 6.4 6.0 6.1

Discount Rate, % 5.1 5.0 5.2 5.2 5.2 0.0% 17% 21% 26% 31% 37% Asset Growth, % -0.2 2.0 2.7 1.3 1.9

1.0% 32% 37% 43% 49% 56% change to forecasts) to change HOLT P/B, x 0.9 0.9 1.0 0.9 0.9

EBITDA Margin (parallel % point % Margin EBITDA (parallel HOLT P/E, x 13.0 14.7 15.4 15.5 14.0 2.0% 47% 53% 59% 67% 74% Leverage, % 0.8 0.9 3.6 3.7 3.9

More than More than 10% Within 10% 10% upside Sales Growth (%) downside 15

10

CFROI & Discount Rate (in %) 5

9 0 8 -5 7 6 -10 2006 2008 2010 2012 2014 2016 2018 2020 5 4 EBITDA Margin 3 12 2 10 1 0 8 2006 2008 2010 2012 2014 2016 2018 2020 6 HOLT - CreditHOLT Suisse Analyst ScenarioData CFROI Transaction CFROI Forecast CFROI Discount Rate 4

2 Asset Growth (in %) 0 25 2006 2008 2010 2012 2014 2016 2018 2020

20

15 Asset Turns (x) 2.0 10 1.8 1.6 5 1.4 1.2 0 1.0 -5 0.8 2011 2013 2015 2017 2019 0.6 0.4 Real Asset Growth Rate Forecast Growth Normalised Growth Rate 0.2 0.0 2006 2008 2010 2012 2014 2016 2018 2020

Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries. Source: Company data, Credit Suisse, HOLT estimates

Comsys Holdings (1721 / 1721 JP) 22 16 August 2016

Companies Mentioned (Price as of 15-Aug-2016) Comsys Holdings (1721.T, ¥1,797, OUTPERFORM, TP ¥2,400) Daito Trust Construction (1878.T, ¥16,455) Dell (DELL.BA^K13, $24.1) KDDI (9433.T, ¥3,255) Kajima Corp (1812.T, ¥739) Kyowa Exeo (1951.T, ¥1,367) NTT (9432.T, ¥4,870) NTT DoCoMo (9437.T, ¥2,714) Obayashi Corp (1802.T, ¥981) Penta-Ocean Construction (1893.T, ¥580) Shimizu Corp (1803.T, ¥976) SoftBank Group Corp. (9984.T, ¥6,804) Taisei Corp (1801.T, ¥809)

Disclosure Appendix Important Global Disclosures Masahiro Mochizuki and Yasuko Fukuda each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Comsys Holdings (1721 / 1721 JP) 23 16 August 2016

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 55% (44% banking clients) Neutral/Hold* 29% (17% banking clients) Underperform/Sell* 16% (38% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Comsys Holdings (1721.T) Method: We base our ¥2,400 target price of Comsys Holdings on FY3/18E EPS of ¥171 and a prospective P/E of 14.0x.A P/E of 14.0x would approach the upper end of Comsys's P/E range since April 2013, so we assume that its multiple will rise to at least the upper bound of this range. Looking ahead, our analysis assumes that equity investors will turn their interest to stocks offering higher total shareholder returns (including share buybacks).Moreover, the increase in orders for new network investment (4G/5G) over the next three years implies growth in earnings at Comsys. Given that 4G project orders began arriving in FY3/16, we think the use of the actual P/E for this period is appropriate.We rate the company OUTPERFORM on the basis of expected total return relative to our sector coverage. Risk: Risks include: (1) a delay to the start of 5G services beyond 2020, resulting in failure to win 5G orders from NTT DoCoMo (9437) in FY3/18 and FY3/19, (2) labor cost inflation and (3) a fall in orders.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (1893.T) within the next 3 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (1802.T).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. For a history of recommendations for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to https://rave.credit-suisse.com/disclosures/view/report?i=241458&v=7e0pd08qm8omauye2s7l5ilmq . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Comsys Holdings (1721 / 1721 JP) 24 16 August 2016

This research report is authored by: Credit Suisse Securities (Japan) Limited ...... Masahiro Mochizuki ; Yasuko Fukuda To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited ...... Masahiro Mochizuki ; Yasuko Fukuda Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.

Comsys Holdings (1721 / 1721 JP) 25 16 August 2016

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1721_081616_ComsysHD_E.d Comsys Holdings (1721 / 1721 JP) oc26